One hundred years ago this month, Henry Ford put “the world on wheels” with the launch of the Model T. Half the price of any other car on the market, and capable of a nippy 45mph, within months it was a bestseller. Alas for Ford, a century later, the car industry doesn’t have much to celebrate. Car sales of every type have plunged worldwide in the past few months.
For the year to September, sales in Japan are down 5.3%. For Europe the drop is 8.2%, the biggest since 1998, and in America, down 27%, car sales have virtually collapsed. The reasons? Firstly, the lack of credit availability. Car financing companies have increased target credit scores for customers, so fewer people are able to buy cars. Then there’s plunging American consumer confidence, which hit a record low this month.
The result has been a string of profit warnings – not just from US behemoth Ford, but also manufacturers from Renault in Europe to Toyota in Japan. No car maker is immune. “The global credit crisis has had a dramatic impact upon the industry as large and new vehicle markets in North America and Western Europe have contracted severely,” GM CEO Rick Wagoner said in a letter to employees.
The problem is particularly acute for US manufacturers, especially Detroit’s ‘Big Three’: GM, Chrysler and Ford. The current slowdown has made a bad situation worse. In 1998, for example, they accounted for 70% of the North American market. Today, it’s closer to 42%. High gasoline prices have seen Americans switch from the gas-guzzling SUVs, such as the monstrous Hummer, to cheaper and more fuel-efficient runabouts from Japan and Europe. As such, sales at Ford and Chrysler are down 35% and 33% respectively this year. GM and Chrysler are close to bankruptcy, while Ford is burning through $1bn a month in cash just to stay afloat.
All this means shares in US carmakers are cheap, of course, but given that credit ratings agency Standard and Poor’s looks as though it could downgrade GM’s debt further, only a truly brave investor would touch it. Citigroup has just downgraded Ford and GM to sell from hold because of the deteriorating credit situation. Chrysler is even more vulnerable and may require a government bailout to survive.
So what about European and Japanese firms? On the face of it, they look more attractive. Fiat and Renault, each trading on forward p/es of three, look particularly cheap. But they’re cheap for a reason. Peugeot has forecast a 17% drop in sales in Western Europe, while Renault has ordered the closure of all its French factories next week for at least seven days. Given that Europe is just entering recession, things are likely to dip before they pick up.
In Japan manufacturers have been hit by the rising yen, up 11% against the US dollar this month. That makes their cars pricey for already reluctant US buyers. So while car makers look cheap, trading as they are below book value, the outlook is grim. “It was already difficult to compete at 100” yen a dollar, says Nissan CEO Carlos Ghosn. “At 93? It’s going to be very difficult.” Goldman Sachs analyst Kota Yuzawa expects earnings to fall by “10%-30% in 2009/2010.” We’d avoid developed world carmakers – and even emerging markets aren’t immune (see below).
It’s no different in emerging markets
Decoupling theory fans believed demand from emerging market consumers would make up for any drop off in developed markets. Indeed, many car manufacturers have invested heavily in them. So it’s a shame the theory is bunk. Take Inchcape (LSE:INCH), the UK-based car retailer that sells luxury cars, such as Mercedes, in places as diverse as Europe, Britain and the Baltic States. It issued a profit warning this month and its shares are down 80% this year. That reflects slowing sales not just in Britain, but also in emerging markets such as Estonia and Latvia. And although sales have matched expectations in Hong Kong and Singapore, the firm expects a dip next year.
Overall, the “market situation in emerging countries is much worse than expected,” said Park Dong-wook, a director at Hyundai, this week. India’s car sales fell for the first time in two and a half years in July and August as the economy slowed, while Chinese car sales weakened for the second consecutive month in September.
And while the global automotive industry is merely slowing in 2008, 2009 may bring an outright collapse, says Jeff Schuster, analyst with American research firm J.D. Power and Associates. “No country or region is completely immune to the turmoil,” he told AFP.